World Coins

Yen remains a ’safe-haven' currency despite up-and-down history

Editor's note: The following is the third post in Coin World's Symbols of Power series about three early coinage units. 

Before you continue, read the first two posts in the series: 

Our third and last term, the word “yen,” is nowhere near as old as “shekel” or “florin.”

Yen-denominated coinage was introduced in Japan in 1871, following the end of two and a half centuries of a policy of national seclusion, and was to play a major part in Japanese attempts to re-engage with the wider world.

The sudden opening of Japan to foreign trade in the mid-19th century caused enormous upheaval and the collapse of the existing currency system. Currency reform was essential and the new Meiji government pursued a policy called “fukoku kyohei,” meaning “rich country, strong army” to bring Japan up to parity with Western nations. Embassies were dispatched around the world to ascertain the best ways for Japan to modernize. 

The new coins were first announced in 1868 and a brand new mint was quickly built at Osaka. Almost every aspect of the design of the new coins represented a conscious break with tradition. Because of their shape in emulation of Western-style coins, the new coins were named “yen,” meaning “round.”

Banking reform accompanied the introduction of the new currency, initially modeled on the U.S. national banking system. Notes issued by the national banks are striking for their similarity to U.S. paper money, in particular the greenback, due in no small respect to the fact that printing was outsourced to the American Bank Note Co. in New York.

It was decided that the yen should be on the gold standard “in accordance,” said the vice minister of finance, “with the best teachings of modern times.” But the mid-19th century trading standard in East Asia was the silver trade dollar, so a compromise was reached in which silver dollars were created for use in foreign trade and gold was retained for domestic use. In effect, Japan was simultaneously trying to put the yen on two standards.

There was, however, just one problem: Japan lacked the necessary gold reserves for a gold standard currency, a shortfall that was exposed during the 1870s when a fall in the global price of silver led foreign traders to buy up and export gold yen coins using overvalued silver yen. Japan’s gold standard experiment had failed within just a couple of years, and was a source of embarrassment to the government. One trade community newspaper remarked scornfully that “she wished to place herself on some imaginary footing with England and America.”

A gold standard yen nevertheless remained desirable, becoming achievable once more after the military successes of the Sino-Japanese War of 1894 to 1895, when an indemnity of 230 million silver taels (356,000,000 yen) was exacted from China. This indemnity, about a quarter of Japan’s annual income, was deposited in the Bank of England, converted to gold and then shipped to the Bank of Japan. There was a lot to be moved, and the Japanese government agreed to spread the payments over several years. At the Osaka Mint, gold coins worth 74,000,000 yen were minted, but did not enter circulation. Instead the Bank of Japan issued notes backed by gold from its new reserve.

This new gold-backed yen could now be used as leverage for borrowing on London’s financial markets. In 1904 Japan negotiated a loan of approximately ¥800,000,000 ($300,000,000, or £82,000,000) to prosecute war with Russia. The loan, on paper only, provides an interesting insight into the mechanics of international finance: as Japan’s prime minister would later explain, “even though England lent gold to Japan, not one ounce of gold went from England to Japan.”

The provision of foreign loans financed the building of Japan’s overseas empire, through which the so-called “yen bloc,” a loose currency union based on the yen was formed. However, foreign loans made Japan’s economy susceptible to international monetary crises. The outbreak of war in Europe in 1914 caused a minirecession, and the suspension of gold exports forced the yen off the gold standard. Yet the overall result of war in Europe was more positive for Japan. Its export market boomed and it became a creditor nation for the first time. This in turn led to a rapid increase in the standard of living and a boom in the luxury goods market. The war period was later criticized as a time of unnecessary excess and decadence. 

If the war represented a time of excess, the 1920s were characterized as a period of economic stagnation. Japan initially wavered in its commitment to restoring the gold standard, and in consequence the yen experienced high inflation. Gold convertibility was almost achieved in 1923 but plans were canceled owing to extraordinary bad luck: the death of the prime minister in office and a large earthquake that struck the Tokyo-Yokohama area, effectively destroying both cities. The gold standard was finally reinstated in January 1930, but its timing, amid global economic crisis, could not have been worse. Japan left the gold standard in December 1931. Bank notes continued to carry the phrase “convertible to gold” until 1942, but the phrase had become meaningless.

The end of the international gold standard and renewed conflict with China caused the value of the yen to plummet. In 1936 the Japanese author Nakano Shigeharu (1902 to 1979) lamented its falling value in his poem “The Rate of Exchange”:

If one yen is not two marks

And it happens that it’s not half a mark

If on the whole the yen is not a mark and not a pound or a ruble or any of these things

What is this darn thing called one yen?

Inflation accelerated during World War II (1941 to 1945), when the Ministry of Finance first introduced a 1,000-yen note and even considered issuing coins made from ceramic. The yen’s turning point came after Japanese surrender in 1945, which signaled the end of Japan’s empire and the dismantling of the yen bloc. U.S. banker Joseph Dodge was brought in as advisor and his policy, the so-called “Dodge line,” helped to reduce inflation. 

Interestingly, no currency revaluation was attempted, although the sen, a now valueless subdivision of the yen, was quietly abandoned. The Bank of Japan now issued notes of increasingly high denominations in value, while in 1955 a new lightweight aluminum yen coin was issued, a design that continues to circulate to this day.

Pegged at 360 yen to the dollar, Japan’s post-war diligence at maintaining the yen-dollar exchange rate helped to bring about phenomenal growth: Japan’s “economic miracle,” as it came to be known. 

After the end of fixed exchange rates in 1971 the yen surged in value, peaking at less than 80 to the dollar in April 1995. Japan’s economy almost matched that of the United States, and economists such as Takatoshi Ito predicted “an expanded role for the yen as a key currency.” But then in the late 1990s the bubble burst, and Japan entered its biggest recession since the War.

Questions are continually asked whether the yen’s mid-1990s zenith will ever be equaled. Yet it has survived more upheaval in its short history than many other currencies have over a much longer period. Its relative stability ensures that it remains a “safe-haven” currency, the third most widely traded after the dollar and the euro. Its place among the “best usages of the nations of the world,” the original aim of Japan’s currency reformers, would appear to be guaranteed for many years ahead.

The yen concludes our brief survey of three coin terms among the many that have impacted on the history of money in some way. They help to illuminate broad themes such as the characteristics of empires, trade, migration and the personalities of rulers. From survivors of the ancient world to the global currencies of the 21st century, it appears the human desire to imbue currency with meaning remains undiminished. 

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